Having a good credit score means you’ll have the best chance of getting approved for credit, plus you’ll get access to low interest rates. So even if you don’t need to borrow money right now, it’s worth taking some steps to make sure your credit score is in tip-top condition, ready for when you do. This post outlines five steps you can take to get started.
1. Pay Your Bills On Time
Late bill payments can go down as a black mark on your credit file and cause your score to drop. Payment history represents a massive 35% contribution on the FICO scale. Lenders look at your payment history to determine whether you’re likely to pay on time or have difficulties in doing so.
Paying your bills on time has a lot to do with being organized. Make a note of when your bills are due and add the dates to your calendar. Do this every month to help you keep track of your expenses.
Automate bill payments where possible. This way, you don’t need to remember to make your bill payments on time. All you need to do is make sure you have enough funds in your account when bills are due.
2. Avoid Overdrafting
If you overdraft and resolve the situation quickly, this shouldn’t have much of an impact on your credit score. However, if you continue to overdraft without bringing your account back to a positive balance, your debt may be passed to a collections agency, in which case the credit bureaus will be notified.
The best way to avoid overdrafting is to plan ahead and make sure you have all your expenses covered. If you’re not great at budgeting, you could consider using an app that alerts you when your balance is low.
One of the best overdraft apps to look into is Dave. This app notifies you when your balance is running low and advances you up to $100 (interest-free) from your paycheck to help you avoid overdrafting.
3. Check Your Credit File is Accurate
Errors on your credit report can result in a lower score than necessary. Check your credit report from time to time to make sure your credit activity is being reported correctly. Common errors include incorrect personal details, incorrect balance figures, and incorrect reporting of account status – e.g. a closed account being reported as open.
If you notice an error on your credit report, you can initiate a dispute and request for the mistake to be fixed.
4. Only Apply for New Credit if Absolutely Necessary
Your credit score may suffer if you make multiple credit applications in a short space of time. Each time you apply for credit, this action appears as a hard inquiry on your credit report. So if lenders see multiple applications, they could interpret this as you being desperate to borrow.
A good approach is to only apply for credit when you need to. As a rule of thumb, don’t apply for new credit until at least six months have passed since you last applied.
5. Keep Your Debt Balances Low
Your credit utilization ratio is a calculation of how much debt you have compared to your credit limit. So if your credit card limit is $5,000 and you’ve got a debt balance of $2,500, your credit utilization rate would be 50%.
When it comes to your credit score, it’s best to keep your credit utilization ratio under 30%. This shows lenders that you don’t have to rely on credit. You don’t need to max out your credit limit to get by – instead, you can borrow responsibly.
Now, you might not be able to take this step today, but perhaps you can make a start. If you can afford to, why not make a debt overpayment? It doesn’t have to be a huge amount, but if you could do this every month, your credit utilization rate would gradually lower and your credit score should improve as a result.
Taking Steps to Improve Your Credit Score
Lots of factors impact your credit score. Payment history, credit utilization rate, hard inquiries and data inaccuracies are just some of them.
Improving your credit score isn’t something that you can do overnight. The time it takes will depend on your personal situation and whether you’ve experienced serious financial difficulties. For example, collections can stay on your credit report for seven years, and Chapter 7 bankruptcies for ten years.
So, although you can’t improve your credit score instantly, you can at least begin the process today by taking some or all of the steps outlined above.